A PE Edition: Maximising Value Creation in Operating Companies

Make a company worth more tomorrow than it is today. Seems simple, right? It’s what gets entrepreneurs out of bed every day.?

But there’s a significant difference between cold calling for your next sale and restructuring an operating company to beat the cost of capital. Private equity firms have a daunting task requiring difficult (sometimes ruthless) decisions, strategic foresight, and rigorous operational discipline.?

Driving transformative change within a portfolio company to maximise value creation involves a multi-dimensional approach that extends beyond short-term revenue generation.?

Often, it requires the assistance of experienced consultants with a better understanding of market nuances. An in-house team might be able to turn the capital investment hose on, but they need someone to point it in the right direction.?

Strategy-as-a-Service is a low-risk, high reward resource that can augment value creation through timely intervention, delivering impressive returns for PE firms.?

I’ve seen this model work well…so well in fact, that I’m betting my company on it!

Let’s dig in.

A Tactical Blueprint for Value Creation

'Let your plans be dark and impenetrable as night, and when you move, fall like a thunderbolt.' — Sun Tzu, The Art of War

No general goes into battle without a plan. But that plan doesn't always need to involve massive layoffs and strict cost-cutting measures.?

Instead, PE executives are adopting nuanced strategies that balance efficiency with growth, innovation with tradition, and short-term gains with long-term sustainability.

Here are the key elements of a sophisticated blueprint for value creation:

Financial Engineering

The financial health of an operating company is always the first option for value creation. There can be simple (but not always obvious) ways to sculpt a balance sheet in your favour and generate long-term sustainability.?

Things like:

Refinancing Existing Debt

As interest rates fluctuate, savvy PE firms can seize opportunities to refinance or renegotiate existing debt at lower rates, significantly reducing interest expenses. This will improve cash flow, reduce the burn rate, and build a runway for other value-creating initiatives.?

Optimising Capital Structure

Assessing the optimal mix of debt and equity minimises the weighted average cost of capital (WACC). This delicate balance enables operating companies to fund new projects and grow without overburdening them with excessive debt.?

Mezzanine financing, senior debt, and various other instruments are leveraged (got to love a well-executed pun, if I do say so myself) to tailor a capital structure that aligns with current market conditions.?

Tax Efficiency

Tax efficiencies are one of the biggest opportunities for value creation after an acquisition or investment. By restructuring transactions and operations to take advantage of tax incentives, credits, and lower-taxed jurisdictions (within legal and ethical limits, of course), firms preserve more capital for reinvestment.?

Talent Management

Here's the one that gets all the bad press—the misconception that PE firms invariably lead with headcount reductions. The reality is much more nuanced.?

Talent management is about strategically positioning the right people in the right roles and fostering an environment where they thrive.

It’s done through:?

• Leadership assessment and development: Evaluating the current leadership team and finding out where gaps exist to upskill or bring in new talent.?
• Performance incentives: Implementing compensation models that align with individual performance (yes, that can mean raises).
• Talent acquisition: Adopting an aggressive recruiting and retention approach, leveraging the new strategic direction as a magnet to attract top-tier talent.?

Sometimes it also means streamlining teams by eliminating redundancies. But that can mean ensuring the company’s skills are being used efficiently, often redefining roles and responsibilities—not just slashing them.?

Strategic Repositioning

When making a riskier bet (e.g. hedging that a seriously distressed asset can be turned around), there needs to be a more dramatic shift. Strategic repositioning isn’t just about tweaking a product line or putting a fresh coat of paint on an old brand; it’s a comprehensive overhaul of a company’s market approach, product offerings, or even its core business model.?

Let’s look at a real-life example.?

PEP and Peters Ice Cream

If you have a sweet tooth like me, you’ve eaten plenty of Peters. What you might not think about as you bite into a Drumstick is that they are a perfect example of strategic repositioning.?

In 2012, Nestlé Australia sold the Peters brand (and a factory in Mulgrave) to Pacific Equity Partners (PEP). While the sale price was undisclosed, reports that year estimated bids of around AU$ 300m, based on pretax earnings of AU$ 11m in 2011.?

PEP and their partners explained the move as a chance to leverage “strong consumer product knowledge and credentials to support the management team and their business strategy.” Over the next two years, the Peters brand was repositioned in the market, with PEP investing heavily in new product development.

In 2014, they executed a very profitable exit, selling the brand for AU$450m to European ice cream giant R&R. PEP Managing Director Tony Duthie called it a successful brand transformation by combining “outstanding management, operational experience, and industry knowledge.”?

Talk about value creation.

Mergers & Acquisitions

Mergers and Acquisitions (M&A) are powerful levers for PE firms looking to turbocharge the growth of their operating companies. It covers things like:

• Strategic acquisitions: Complementary businesses that can instantly expand product lines, customer bases, and geographic coverage.?
• Synergistic partnerships: Integrated operations, consolidated supply chains, and merged administrative functions can drive costs down and increase efficiency.?
• Roll-ups: In fragmented industries, PE firms can execute a roll-up strategy, acquiring multiple smaller players to create a larger, more competitive entity.?
• Technology and IP acquisition: In fast-moving sectors where in-house R&D is outpaced by market innovation, private investment can purchase smaller companies for their intellectual property.?

These strategies will accelerate growth and make a more robust, diversified, and resilient company. Done correctly, it’s like pouring jet fuel on a bonfire.?

The Role of Strategy-as-a-Service in Private Equity Value Creation

Those value-creation levers have something in common—they are strategies and actions driven by insights that don't just materialise out of thin air. Uncovering and implementing these moves requires a blend of analytical prowess, industry expertise, and a nuanced understanding of the market.?

That expertise isn’t always available in-house, and probably shouldn’t be. External consultants can provide:

Specialised Expertise

External consultants often bring deep industry knowledge and functional expertise in areas like supply chain optimisation, digital transformation, or cost reduction. This allows PE firms to identify and execute value-creation opportunities more effectively.?

Objective Perspective

Struggling companies often require an unbiased, third-party perspective to successfully audit performance and strategy. This objectivity is valuable in challenging internal assumptions, identifying overlooked opportunities, and making tough decisions that may cause internal stakeholders to hesitate.?

Resource Leverage

PE firms often operate with lean teams and manage multiple investments simultaneously. Engaging external consultants allows them to scale resources up or down based on the specific needs of each portfolio company without having to maintain a large permanent staff.?

This flexibility can be particularly useful when undergoing intensive transformation periods.?

Speed to Implementation

Get in and get out. Time is a critical factor in value creation, given the typical investment horizon of three to seven years. Consultants can accelerate the analysis and implementation of strategic initiatives like:

• Market entry
• Cost reduction
• Digitalisation and systems integration

Their know-how gained from managing similar projects and the relationships and tools they’ve coalesced over many years of refinement are invaluable resources for funds under pressure to deliver stellar returns (at pace) to investors.

Bottom Line

‘In the midst of chaos, there is also opportunity.’ — Sun Tzu, The Art of War (again)

Value creation doesn’t have to be chaotic. It requires creativity and inspiration, sure, but some frameworks and strategies have stood the test of time. Just because you have a map, getting to the middle of the labyrinth is still a feat of strength.

Combining the visionary leadership of private equity with the nuanced, data-driven approach of strategic consultants (the kind that can also roll their sleeves up and execute of course) creates a formidable force that can anticipate shifts, capitalise on trends, and overcome barriers to value creation.?